滙豐控股 (HSBC) 2006 Q1 法說會逐字稿

Welcome to HSBC Finance Corporation and HSBC USA Inc. first-quarter 2006 results conference call.

Today's call is being hosted by Bobby Mehta, Chief Executive HSBC North America Holdings Inc. and Chairman and Chief Executive HSBC Finance corporation;

Martin Glynn, Chief Executive Officer HSBC USA Inc.;

Douglas Flint, Group Finances Director HSBC Holdings PLC; and Simon Penney, Chief Financial Officer HSBC North America Holdings Inc.

Once the presentation is finished there will be an opportunity for questions and answers.

At this point I would like to hand over to Douglas Flint to begin the presentation.

Over to you, Mr. Flint.

Thank you very much and thank you to everyone who's on the call, particularly those in Asia who've stayed up for it.

And I pass over to Bobby Mehta who's going to introduce the subject matter and start off.

Thank you, Douglas.

And let me also join Douglas in thanking everybody on the call for their interest.

We will be locking through, as we've done in past quarters, the 8-K supplement that was filed and I'll start with page 4.

The first three pages really talk about the basics of reporting and the fact that there will be some forward-looking statements and the customary cautions with respect to that.

Page 4 -- and I'll actually just highlight the different aspects as opposed to going through it in enormous detail since I imagine most of you have had the opportunity to see this since we filed on Friday.

Page 4 is essentially the summation of the Finance Corporation and HSBC USA Inc.

On a gross basis you can see combined profits for the period going up about 4.6% and that includes the derivatives impacts.

Excluding the derivatives impacts, which were significantly larger in the first quarter of 2005, I'd underline profit growth is faster than that and we're really talk about that in the context when we talk about the Finance Corporation and then the bank.

With that, if you just move on to page 6, you'll do a low bit of a deeper dive into the Finance Corporation.

Overall I think I would say that we had a strong quarter with good underlying business trends, good results really across the board from all businesses.

Favorable credit performance I think is one of the big stories of this first quarter -- obviously related to lower bankruptcies and that in turn has an impact of what we think is a full forward of bankruptcies into the third quarter of last year and the fourth quarter of last year.

We saw good customer loan growth, a good underlying U.S. economy in terms of unemployment in terms of wages, and we've seen I think stabilization of net interest margin as well which I'll come on and talk about.

Customer loans were up 18% versus March of '05.

The Metris integration is on schedule and we're pleased with the progress to date.

And just to remind people, the first quarter includes the seasonal impact of the taxpayer financial services business; so first quarter is habitually an up quarter for us relative to the second, third and fourth quarters.

From a profit perspective, profit after tax increased 12% year-over-year, profit before tax around 13.

And excluding the impacts of derivatives and fair value, profit before tax obviously increased much more dramatically, about 49%.

Net interest income increased 12% year-over-year due to strong loan growth.

Our customer loans grew 18% with good organic growth really across all products and portfolios relative to the underlying growth in the market.

And when you talk about net interest margin, while you've seen net interest margin down from first quarter of last year to first quarter of this year, we have seen a sequential stabilization in net interest margin.

Loan impairment charges decreased significantly from both the prior quarter and the prior year first quarter driven by the bankruptcy filings following the change in the U.S. legislation.

The reduction of the estimated exposure associated with Hurricane Katrina -- if you'll recall, we took a provision at the end of the third quarter last year, we've been monitoring the portfolio.

And as the Katrina portfolio is seasoning, we are basically beginning to see good payment behavior from that portion of the population.

And we're seeing lower loan impairment charges due to the mix of near prime loans in the books both from a mortgage and auto finance perspective.

All of that also continues to be underpinned by a continued favorable U.S. consumer credit environment and I'll talk a little bit about some initial softening we're seeing in the real estate market.

Moving on to page 7 which is the income statement, I just again point out the growth in the profit for the period, up 12%.

From an operating income or revenue perspective, if you again adjust for the derivative and fair value impact operating income or revenue is up in the low teens and that is -- again, we're seeing positive operating leverage because costs are up about 8%.

Other operating income you can see declined relatively sharply from December 31 to March 31, 2006.

And underlying growth in operating income continues to be strong.

The big, if you like, non-recurring item in the December 31st number was a gain on sales of the HSB UK credit card portfolio (inaudible) [HBEU].

Other than that, I think if you look at the underlying efficiency ratios and costs, relatively stable from the December quarter, and operating expense as a proportion of average customer loans continues to decline.

Some of that is driven by mix shift from unsecured to secured, but also I think is evidence of the continued focus from a cost perspective.

Moving on to page 8 -- this is a chart that -- a collection of charts that we've shown now for the last five quarters I think where we track on a management basis derivative of U.S.

GAAP the net interest margin with adjusted revenue from return on managed assets.

And I think again what I would take away from this is you see a stabilization in essence in net interest margin and then you talk about the individual initiatives in the businesses -- we've put a lot of focus on segmentation and pricing and we're beginning to see the benefits of the pricing coming through in the stabilization of margin and increase in gross yield.

And then that added to the growth in fee income and the continued favorable credit gives us the improvement in return on managed asset.

So again, trends that we are -- even if you strip out, if you like, some of the extraordinary benefit from credit in the first quarter of bankruptcy, I still think you're seeing a positive trend in ROMA, risk-adjusted revenue and certainly net interest margins.

Moving on to page 9, the top line once again represents the risk-adjusted revenue line and then the two lines below represent charge-offs and 2+ delinquencies.

As I've said in the past, our charge-offs are sort of a retrospective view of credit quality and 2+ delinquency is a prorespective view.

And again, first quarter of '06 is flattered by the extraordinary benefit coming in through much lower bankruptcy filing.

But the underlying credit I think continues -- even if you strip that out our view of the underlying credit is good and stable and that from our perspective clearly is good news.

Moving on to page 10, which gives an overview of the customer loan mix, what you see is strong growth in residential mortgages really continuing to represent where the market is relative to the overall market in the consumer lending/consumer loan space.

Our branch residential mortgage growing 13, the corresponding business from 41%; to some extent that's a reflection of the extraordinary growth we had in 2005 if you compare March '06 to March '05, more moderate growth if you look at March versus December.

MasterCard Visa you see the growth compared to March '05, that clearly represents the integration acquisition of Metris.

And then you see the negative growth between December '05 and March '06 for both MasterCard and private-label; that essentially represents the seasonal run-off from the year-end holiday peak that we experience in both those businesses.

Also good growth in the auto loan and motor vehicle finance business and they're continuing to grow well, both in the dealer channel as well as in the direct to consumer channel.

Let me comment a little bit on the real estate market; this seems an appropriate place to do that.

We certainly see appreciation slowing in particular markets and we're watching that very carefully.

We do not believe that there is a national bubble that's about to burst, but we're watching particular markets carefully.

We believe that both the finance Corporation as well as the bank's real estate portfolio are both well diversified geographically and are predominantly first mortgages.

From a nonprime or HSBC Finance Corporation perspective, we are underrepresented in the hot markets -- for example, states like California, New York, Florida and Virginia.

Also from a nonprime or HSBC Finance Corporation perspective, we are, as we've always been, focused on owner occupied homes and market value homes which tend to be much less volatile and much less prone to cyclicality from hot real estate markets.

These are homes where people who live in them -- that's their primary residence and therefore experience -- credit experience in those markets is primarily driven by employment and wages as opposed to the (indiscernible) of the capital appreciation in those markets.

From an alternative mortgage and interest only perspective we are -- we tend to be underrepresented proportionate to where the market is and we have tighter origination criteria in terms of higher FICO, lower LTV underwriting guidelines in those alternative mortgage segments.

As I said earlier, we are seeing some softening and I'll comment on that as I get on to page 11.

Moving on to page 11, if you look at our retail branch channel which is HSB and Beneficial and are corresponding and wholesale channels which is our mortgage services business, again you see overall good growth in both those businesses.

We have seen on the resident -- again, in both businesses we are seeing the emergence of some pricing rationalization as we see improved returns on new production in our wholesale channel and we see improving yields and stabilization in net interest margin in our retail and branch channels.

In our branch channel cross sell continues to expand; we've put an increasing focus on that and in particular want to draw your attention to the growth and good cross sell in motor vehicle loans and credit card sales in branches.

And if you look retrospectively, credit quality continues to be stable.

And what do I mean when we say that we're seeing modest signs of slowing, we're seeing some slight uptick in real estate in repossession and some slight uptick in mortgage severity on those repossessed homes that we sell.

We are putting a very significant focus on that and we believe obviously that we have our arms around it, but we do see that happening as we go forward.

Moving on to page 12, our two cards businesses, strong profit growth in both those businesses.

In our credit card business we see increased net interest margin as a result of weak pricing and the growth of the nonprime book continues to see good growth in fee and other operating income due to both the brand portfolio and interchange fees.

We see good credit quality.

As I said earlier, the Metris integration is on schedule.

(indiscernible) talked to you all about in the past where we continue to monitor the impact of minimum payment on the portfolio.

We expect that to be more of a second half impact, although we're continuing to monitor very carefully signs in the early buckets of delinquency and changes in customer behavior as a result of the minimum payment guidelines going into effect.

And it's too early to say definitively how that's going to pan out, but we are monitoring that very closely.

On the private-label side we continue to focus on signing new merchants; we signed Boscov's Department Store in April.

We continue to expand through better marketing in partnership with our private-label merchants and customers; how we grow the program through enhanced underwriting terms and service and continue to work with them in terms of integrating our marketing area with theirs.

We continue to see good performance from a risk adjusted revenue perspective as some NIM compression has been more than compensated by fee income and good credit performance.

And once again, the same comments I made with respect to credit cards pertain to private-label from a minimum payment point of view.

Moving on then to page 13 -- the auto business, as I said earlier, had good organic growth in the dealer channels.

We're also seeing good growth in the direct to consumer channel.

We are continuing to formulate and refine our mix from a (indiscernible) in terms of the credit spectrum and we're seeing coming through the benefit of lower near prime -- higher near prime -- a higher proportion of near prime loans coming through in lower charge-offs and higher risk adjusted revenue which is what we've been saying to you over the past year.

And we continue to focus on our collection strategy.

Lastly, on auto I think we've also been the beneficiaries of good secondhand auto prices as evidenced by continuing increases in the Manheim Index which is an index of used car prices.

TFS -- a good quarter for the TFS business where we've expanded our relationships with existing partners as well as expanded our product offerings to provide greater convenience to our customers to have prepaid debit card fees.

Canada, again, a good performance overall both from the branches as well as through the growth initiatives in the motor vehicle and card area.

And again, consistent with the overall robustness of the Canadian economy, we see good credit quality.

And the UK, we continue to focus on credit and lost mitigation in the challenging credit environment, although I think it's fair to say we see some stabilization there compared to this time last year.

So overall, stepping back from it all I'd say while we continue to see -- this quarter we've seen exceptional credit even if you strip out the underlying benefits of bankruptcies which I think obviously can be viewed more like a onetime event.

But we see good credit quality underlying, good cost growth, some emergence of topline revenue momentum in terms of net interest margin stabilization and yield (inaudible) growth in yields.

We continue to focus on cost, net interest margin, maintaining maintenance on risk adjusted revenue as well as ensuring that you're monitoring the real estate markets very carefully as well as the minimum payments that impact carefully us as we go forward.

So overall I would say I'm pleased with the quarter and the underlying performance, we continue to monitor the real estate market and the impacts, as I said earlier, of minimum payments very carefully and will continue to do that for the duration of this year.

With that, for a discussion of HSBC USA Inc., let me turn it over to Martin Glynn.

Thank you very much, Bobby.

I'm on page 15 of the package.

We had a solid quarter in the first quarter of 2006.

Within the context of continuing expansion strategy around CIBM, around geographic expansion within the U.S. and around significant deposit growth.

The underlying businesses tracked well.

We had excellent loan and deposit growth.

We did continue to invest in the CIBM and the personal financial services area, although the investment in the corporate investment bank is now leveling off as we have indicated in the past.

Credit quality remains strong.

As far as domestic deposits are concerned, we grew 20% year-over-year and had some very favorable experience with our online savings account which was launched last fall and is a market leader and continues to perform well.

We had 14% growth in our core bid market and small-business areas, which are performing well, and revenue overall grew 8%.

Profit against last year was down 3%, although last year first quarter was the strongest quarter of the year, but it was up considerably over the fourth quarter of 2005.

We suffered from net interest income compression; the yield curve hurt the organization.

On the other hand, in the CIBM space we had some very favorable trading experience which more than offset that and it bodes well as we continue through 2006 and certainly reinforces the investment that we made in that particular area.

And core deposit growth is well spread among our commercial banking area, personal financial services and private banking, so we have seen that success rate across the board.

As I mentioned, credit quality remains strong.

We did have releases and recoveries in the first quarter of last year which compares negatively to this quarter, but the performance is essentially the same net of that.

Operating expenses rose roughly 15%, although 10% of that represents our investment spend and, as I mentioned, the CIBM platform is largely complete and therefore we will see much lower spending increases quarter over quarter.

I must point out that as we have added roughly 30 branches quarter over quarter and rolled out our online savings account, that our numbers compare very favorably to what the equivalent would be if we were looking into the investment or the M&A world and we're very pleased with how our deposit growth is tracking with our new branches and with that new channel.

As we turn to page 17, just looking specifically at PFS, or personal financial services, we have in the first quarter put on almost $1 billion a month of online savings deposits and are very excited by that channel which is now gathering deposits from all over the U.S.

The majority is outside of our foot prints and this gives us significant brand expansion and opportunity for business outside of the bricks and mortar footprint which we have.

Branch expansion continues and we also have a number of interesting brand initiatives that have emerged in the first quarter including the first-ever branding of the New York airports and you're going to see that rollout throughout the second quarter.

As far as the commercial banking results are concerned, they had very good results both in deposit and loan growth and they continue to expand in a number of cities throughout the U.S. outside of New York State.

With regard to private banking, very good first quarter on a number of fronts.

Again, they are expanding outside of New York state.

Wealth and Tax Advisory Services had significant revenue growth and we benefited there from a private equity investment management fee.

As far as CIBM is concerned, as I said, the trading revenues were very positive in the first quarter.

The managing of the balance sheet revenues is down, but more than offset by trading revenues.

And we have a number of areas there that have had strong performance including the cash management -- the transaction banking area where we have developed NAFTA products and have had significant growth year-over-year.

As I mentioned, their expense growth is reducing over time and we are optimistic about its future.

I would like to turn to Douglas Flint just to comment a little bit more on CIBM globally and then be available to respond to questions.

Martin, thank you.

I think the only point to make is, as you appreciate, the results that you see here are simply the North American results of CIBM within the bank in America.

It doesn't include the securities brokerage and of course it's only part of the international business.

And therefore when you seek to compare the results of CIBM North American with domestic North American (indiscernible), remember that it's only one portion of an international business with the majority of our rates and structured businesses being in Europe rather than in New York.

And that's really the context I think we should just draw to your attention.

I think at this point we'd very much like to hand over to questions and we'll do our best to answer them.

As always, it helps us if you identify yourselves so that we have a record of how the call has gone.

So if I can turn it over to the coordinator to tell you about the logistics we'll do our best to answer the questions that you have.

(OPERATOR INSTRUCTIONS).

Ian Smillie, ABN Amro.

Two questions, please.

The first one, Bobby, if we take out the derivative impact on your revenue growth, it looks like there's something like 14% year on year.

There is a little bit of acquisition benefit in there though I'm guessing from Metris.

So I guess I'm asking, is that a good number for us to carry forward for the rest of the year?

Ian, thank you for your question.

Let me answer it in two parts.

The first part would be is your arithmetic right?

I think it is from an historic perspective.

There is, as you point out correctly, some acquisition benefit in those numbers and I think I would be loathe to point to any particular number in terms of revenue growth through the rest of this year in the interest of not being too forward-looking in terms of how we represent our business.

Could you tell us what the number was ex the acquisitions, Bobby?

I don't have that off the top of my head because that's a number that perhaps we can get back to you with through Patrick.

Thank you.

The second question was on fees -- which powerful growth rate there, which I'm pleasantly surprised with given the improving arrears strength.

And I guess I was wondering how much would you still guide us to think about fees as being related to arrears and how much are you broadening away the fee generation capability so that that historic relationship might be less solid going forward?

We have put a lot of focus, Ian, on broadening the base of the fee-based income in the Finance Corporation.

We are broadening where and how we deal with enhancement services income which is not necessarily driven obviously, as you know, by late fees and over limit fees.

There will be some depressing impact on fees as the impact of minimum payments comes in.

And so, I would say the countervailing affects like in terms of underlying performance and underlying building the business, we are attempting to broaden the base of fee-based revenues across all of our businesses.

Thanks, Bobby.

Simon Samuels, Citigroup.

Good afternoon to everybody.

Just a few bits and pieces of questions if I can.

First of all, I just wanted to check if the calculation makes sense and then you can comment on the going forward.

The risk-adjusted return in the Finance Corporation up to 7% from I think it was 6.1% in Q4 or 6.5% in Q4 ex the Katrina charge -- you indicated 100 million of bankruptcy related charges at the end of last year.

Is it that number therefore that we might want to think of as that was the bit that was front ended that might otherwise have appeared in Q1 this year?

And if so, then I think the risk-adjusted return is not the 7%, it's nearer sort of 6.8% which is a bit of an improvement clearly.

Does that math sound right?

And then my question really is whether a 6.8% risk-adjusted margin is -- is that just returning and that obviously just basically gets you back to where you were a year ago?

Do you think that's a sustainable rate going forward?

Simon, thank you.

This is Bobby. 6.8 does sound right -- order of magnitude.

And I think as we've always said that, one, first-quarter risk-adjusted revenue is always higher because of the PSF business; and second, I would expect that what we as management are ascribing to do is essentially continue the pattern that we've always said the Finance Corporation had a relatively stable risk-adjusted revenue in the zone that you see represented on the chart.

And that's really what we're ascribing from a management perspective to achieve.

The second question was -- I was wondering -- I guess it would be (indiscernible) Bobby or perhaps Douglas might just expand on the comments of the credit trends you're seeing in the UK.

Obviously your international segment numbers we can't really use because you've sold the credit card business within that.

So I guess -- well, first of all, can you tell us -- I guess it would be on a sort of management basis, what the international segment's bad debt charge was in the UK?

It's kind of what the same scope provisions are and maybe you can just comment a bit more on the comment I think you volunteered, Bobby, about some signs of stabilization in the UK?

Basically I don't have those specific figures off the top of my head here, but I think we're continuing to see -- it's a challenging environment, and Douglas can expand on it, but I think we're seeing a stabilization in terms of the credit environment in the UK, certainly in our business.

As we've put significant focus on collections, adding more analytics to the collections operations, more resources to the collections operations as well as improving the underwriting.

So I think -- and then what you're also seeing is that from a bankruptcy and IDA perspective there is growth compared to last year in terms of bankruptcy filings, but that growth is moderating.

So those are some of the high points, Simon, and perhaps Douglas would like to do that.

Exactly what you said.

I think we indicated it when we did the results for last year that we took a number of actions in mid 2004 in relation to some of the vintages that were changing underwriting practices and collection efforts and so on and so forth which had flowed through beneficially towards the end of 2005.

Those benefits continue to flow through and I think stabilization maybe with some modest parts of the portfolio showing a big improvement is probably a fair characterization.

I think we remain cautious in terms of what the macro picture is in the UK towards the second half of this year.

But stabilization against a trailing quarter is a fairly accurate statement.

Okay, great.

And then my last question is for Martin which is just the performance of the online savings deposits, the billion dollars a month in each of the first three months of the year.

Can give us some sense of the ultimate sort of ambitions for that deposit governing channel?

It's given us great optimism that this is a channel that has significant value to us.

We are looking at the behavioralization of these deposits.

Clearly we wish to view them as being sticky and to be a key part of our funding base as we grow.

We actually reduced the high introductory rate that we had slightly and, as a result, we are looking at how they behave.

And so everything we've seen looks good so far, but actually there is a significant reduction in the growth as we expected.

Okay, thank you very much.

Bill Stacey, Credit Suisse.

Bill Stacey from Credit Suisse in Hong Kong.

My question is just following upon the detail that you gave around the mortgage business in the U.S. and you've highlighted that it's slowing down.

I wonder if you could elaborate a little more on what you think that might do in terms of the volumes of origination during the balance of the year and whether you think that would also contribute to any changes in the pricing environment within the mortgages?

Bill, this is Bobby Mehta.

I think you will see an overall contraction in the mortgage market, particularly the refinance segment of the mortgage market, both in the prime and the sub prime states as you look out to the end of the year and that's not unexpected.

At the same time, what you will see is a reduction in prepayments.

So those two impacts tend to balance each other out from an overall portfolio perspective.

So while you're producing less you're retaining more and they tend to balance each other out.

And therefore to some extent favor players who have a strong incumbent position.

From a pricing perspective, as I said in my earlier comments, we are beginning to see for the first time some reduction in origination capacity in the U.S. market.

That's something we had talked about and have talked about in past quarters and it's finally now beginning to happen.

And as a result we expect to see some ability -- some rationalization, if you like, in terms of pricing and particular pricing for risk.

And that plays into clearly the strengths that we have.

We have been seeking to do that, we have done that.

We've in a sense at the margin given up volume for profitability and we see the market to some extent coming toward us in that direction.

I think if I could add to -- another observation just to bear in mind is that consistent with what Bobby said about potentially a slower origination market in the U.S. over the near-term, you've seen quite a number of -- the Wall Street has these, you have large mortgage securitization businesses by mortgage origination channels to secure flow into those securitization businesses.

We've actually of course done it the other way around.

We have in fact a huge mortgage origination capability both within the Finance Corporation and through our own correspondents.

And we've been building the asset-backed mortgage-backed securitization capability in CIBM in New York to take advantage of being able to take value from the whole of the mortgage chain in the United States.

And so while a lot of focus has been on people securing access to origination, the other way around is what we've done, and we think that having that complete value chain mortgage business gives us a wider range of options.

Thanks very much.

Tom Rayner, Citigroup.

Just going back on what Bobby said on the risk-adjusted margin, I hear what you're saying, that you hope to do manage it sort of stable.

I guess the return on managed assets might be a more important metric and it seems that that was doing better in the first quarter because of some sort of noninterest income -- I think you mentioned fees may be growing more quickly.

Is that a trend which you expect to continue going forward?

Could we see that the return on managed assets performing may be better than surely the risk-adjusted revenue?

Without wishing to, again, say what the return on managed assets will be going forward, I would point you to at least what I said earlier, that one of the key initiatives that we are working on, have worked on and are beginning to see some fruits of that is expense control across all of the aspects of the business.

So that obviously that's the key difference between RAR, or risk-adjusted revenue, and return nonmanaged assets.

So there's a lot of focus -- if you go back to a year ago, we put a lot of focus on net interest margin and management of credit, that continues and we're layering on top of that a focus on expense control.

As we do more prime assets you would expect them to have a lower risk-adjusted margin, but a lower cost of service which would come through enrollment.

So there's been a creep towards a higher quality in terms of charge-off credit risk and that comes through enrollment but not in risk-adjusted.

So there's not a significant difference in terms of the revenues that are not part of the net interest margin calculation growing any more quickly?

That would show up in the risk-adjusted revenue line.

Total revenue is in there, is that right?

That's correct.

Thank you.

And just to quickly ask on the balance sheet management income, is it still a drag as you said?

Given what's happened to the yield curve, could you give us any indication if say the yield curve was to now remain as it is, when you'd expect maybe that drag to start becoming either neutral or even a positive influence on revenue overall?

It's Martin here.

It's a tough question to answer.

We've had in the past a significant amount of income from that source and I can't prejudge interest rates and we're managing it very intensively.

So this is an industry wide phenomenon and we have the same impact on our business that others face.

So I can't make any predictions about the future.

Is it in your case purely the technical reinvesting of the service funds which is earning you less?

Or is the flat curve actually affecting the volumes of customer business that you're seeing?

We've seen good volumes.

Although as Bobby has mentioned, the mortgage demand is down and the refi market is down in the mortgage area.

But we continue to see good volumes of business.

And of course, our emphasis that we've made in the last 18 months on deposit growth and improving the funding patterns of the bank, of course, have generated very high-value deposit business.

So as the short end of the curve rises the value of our deposits that we generate increase dramatically so there are some negatives and positives that come from the higher short-term interest rates.

Just adding to that, Martin, if the question really was around is the flat yield curve depressing -- what's the impact of the flat yield curve on the impact of customer driven business in our markets area, I think as Martin said, we've seen very good growth in customer volumes and customer business in the markets area really bringing to fruition a lot of the investment that we've made in building out our platform in new areas like structured derivatives where we've had a naturally strong franchise like foreign exchange in precious metals.

And indeed in the mortgage-backed capabilities that we've been building in our markets area as well.

So we've seen good uptick in essence fee-based income or customer driven business in our markets area which, as Martin said, more than compensated for the drag in the balance sheet management aspect of the business, both of which are captured within CIBM and the bank.

Okay, thanks very much.

Robert Law, Lehman Brothers.

I wanted to ask a few questions on some of the points that have been raised.

First of all on the margin, could you outline or quantify for us the factors behind the improvement there?

I certainly wasn't expecting an improvement on a sequential basis.

Sure.

I think the easiest way -- are you asking -- I presume, Robert, you're asking about margin on the Finance Corporation side?

Yes, that's right.

I think probably the easiest thing to do would be to look at -- what are some of the aspects?

Part of it is the infusion of Metris which is increasing the unsecured proportion of our receivable base that comes from unsecured generally high yielding receivables, that's one.

Second is overall -- that's one.

Number two I would say has been really the impact of repricing initiatives that have come through in our mortgage services business, in our HFC and beneficial branch-based real estate business as well as in our auto business.

And we're seeing improved pricing and yields on a sequential basis.

How much would you say, Bobby?

I don't have that off the top of my head, Robert, but if you look at the HSBC Finance Corporation Q, which isn't on a management basis, but on a managed basis I think you can get an order of magnitude of come of the impacts there.

And what kind of liability pressure do you see?

I'm sorry, could you rephrase that question?

What kind of liability spread pressure did you see?

We saw a higher cost of funds of about 70 basis points roughly, roughly on a managed basis.

Secondly, could I ask about the invitation you've given us to look at things excluding hedging ineffectiveness, mark to market, etc.?

Are there any other positive offsetting movements in revenue that we ought to take into account when we do that?

And do you expect over time these things to sum to zero?

Okay, if you compare to first quarter of last year, really I think the big variances -- and Simon is here and he can correct me if I misspeak -- Simon Penney that is.

The big differences really are the incremental revenue that came from net income or from financial instruments designating a fair value and trading income, which are the two lines that I think I footnoted on page 7, and the corresponding numbers for the first quarter this year are much smaller.

So I think those are the two big ones that I would point to.

Just to add to that, Robert, there are some significant items certainly within the first quarter '05 versus first quarter of '06.

As Bobby mentioned earlier, the fourth quarter of '05 did include the (indiscernible) group appearing on the UK card sale.

That's the only other line item you'd need to adjust for.

I think your question about the derivatives -- do these seem to have (indiscernible) over time?

Absolutely right, these are economic hedges and we've got far less derivatives volatility or noise coming through the numbers now as we've reestablished some of the hedge accounting that we had lost at the back end of '04/early '05.

So you'd expect to see smaller numbers going through on a forward basis.

There will still be some derivative volatility there, but I think it's more like what we've seen in the first quarter this year of its market movement than we saw in the beginning of last year.

Can I have one more and then I'll shut up.

What was the TFS revenue?

I think you did give us it last year, but I can't see it so far.

If you look at the Q -- I was just, Robert, verifying that I remember the right number.

It was $234 million as stated in the HSBC Finance 10-Q compared to $243 million last year.

And while that looks negative the first-quarter number of last year had the benefits of a bad debt sale.

So there is underlying growth in those numbers in the high single digits.

Thank you.

(indiscernible), JPMorgan

This is (indiscernible) from JPMorgan in Hong Kong.

A couple of quick questions.

First of all, just to confirm the contribution from Metris' 23 million for the (indiscernible) net income, is that correct?

Yes, that is correct.

And just going back to the whole mortgage issue and interest rates, have you done any stress testing of your book in terms of the impact both in volume and on credit which added risk interest rates might have on your portfolio just as a mortgage book?

I understand it's not focused in the hot areas, but it's not exactly [prime either].

And related to that is, what proportion of your books are option arms?

Let me answer the first question.

We do extensive stress testing of our mortgage book.

We look at it by MSA, we look at the existing portfolio, the underwriting standards for the new and we also do a lot of econometric studies as to what impact higher rates, etc., have on the credit performance, which I think is your question.

And by far in the nonprime states what you see is unemployment and wages typically having -- unemployment and wage growth having the biggest impact on charge-offs and delinquencies as opposed to a slowdown in depreciation, etc.

In our retail business, HFC and Beneficial, the vast majority of our portfolio is fixed-rate and is match funded.

So we don't see an uptick in cash flows or cash outlays for our customers as rates increase.

In our corresponding mortgage business you'll see a higher proportion of adjustable-rate mortgages in that book.

Although we look out and look at what the resets are; a big chunk of our production is in the [T27] as opposed to the [T28].

And we are proactively managing and looking at what the impact of the rate resets are likely to be and we're monitoring it and managing it.

In terms of option arms, we have a very low proportion of option arms -- I don't have the exact specifics.

In the finance company we have no option arms.

That's right.

And within the prime mortgage business, which is very high prime business, we do have option arms but in a lower LTV.

Bobby, could you give us some numbers in terms of what that stress testing does?

I'm sure you're monitoring it very privately, but if you could share some numbers in terms of what it does mean or where the pressure points might be?

It's very hard to do it in this forum certainly and we've historically not shared those kinds of statistics.

Suffice it to say I think that we don't see a significant impact as a result of the stress testing that we have done.

And frankly, what we use it for is not just for measuring impacts, but more importantly for saying what if anything do we need to be doing differently in terms of existing portfolio management strategy, existing -- changing the underwriting policy, etc.

So that's really what we would consider to be somewhat proprietary information.

Okay.

And just very quickly, on the MasterCard/Visa, there was a very modest uptick in the delinquencies.

And I'm just wondering, is there a seasonality or is there anything more to it?

Is there any specific underlying weaknesses that you're (indiscernible) in the business?

Yes.

I think that was really a normalization of the Metris book from when we basically purchased them.

And a lot of that was the result -- and I certainly don't fully -- I couldn't give you chapter and verse, but essentially a lot of it is accounting noise related to how we booked the Metris receivables and then how as receivables come on to our books and delinquency buckets fill you will see a normalization.

So nothing untoward is I think the headline to take away.

Okay.

Thank you very much.

Jon Kirk, Redburn Partners.

Nick Lord], MacQuarie.

A couple of questions actually.

The first is just a clarification of the answer you gave to Robert on margin.

You talk about higher cost of funding having 70 basis points impact on (indiscernible) I'm taking that's year on year, isn't it?

Yes.

And just in terms of delinquencies then is the main question.

Obviously we've seen what should be a reasonably good quarter this year, you've got the benefit I suppose of lower delinquencies from a bankruptcies point last year.

You've still got very, very good credit quality in the U.S. overall.

What I'm trying to get a feel for -- where do you expect delinquencies to go from here?

Do you expect that we're at the low point in the U.S. generally?

Do you expect you're going to be able to continue to offset by lowering risk in your loan book?

I'm just trying to get a feel for where you're taking the loan book in terms of risk next?

Where we want to take the loan book is to some extent driven by the market and to some extent driven by where we see opportunities for growth.

The benefits that we have certainly within the Finance Corporation is that we are in essence full spectrum lenders and full product lenders.

So we can be opportunistic and take advantage both from a portfolio acquisition standpoint as well as an organic growth standpoint where we see the opportunity as we did when we acquired Metris in 2005.

But to some extent that is driven by where the market is.

We look at -- and where is the market?

The mortgage market, despite the fact that it's coming off what is a very heady, it's still showing significantly higher growth than aspects of the unsecured lending market like credit cards or unsecured personal loans.

And our objective is to grow faster than the market in every segment that we're in.

If the outcome of all of that continues -- or will it be that we see some modest increase in real estate in terms of proportion of the portfolio, I think the answer to that also is yes.

So you should expect to see some modest increase in the proportion of real estate in the overall book because that's where the market is.

Now, to the extent that real estate has an inherently lower delinquency and charge-off rate than some of the unsecured we should see some of that benefit flow through as the loan book moves in that direction.

And lastly, your question around where is the economy going, I think we've said for a while that credit is exceptionally good and if the economy -- if unemployment goes up, if the economy begins to slow, if the number of hours worked which is a significant predictor of delinquencies and charge-offs for the finance company slow, then we should expect to see an uptick.

And we tend to have corresponding offsets in terms of higher fee income from late-season over limit fees particularly in our unsecured book and our [COG] book as that happens.

But if you begin to see unemployment and hours worked unemployment go up and hours worked go down you should expect to see some increase in delinquencies, although less than one might have expected given it would be less than we experienced in the last cycle because in this cycle within the Finance Corporation we have a higher proportion of real estate secured in our books.

So I don't know if that's helpful to you or not, but that's the way we look at it.

And are you still actively derisking your sale book?

I would say we continue to move into the near prime area with our supposition and let me reiterate the logic for that.

In the near prime book we do believe is our sweet spot because it is a higher risk portfolio than what the captive and the prime lenders are doing, number one.

Second, the risk there is predictable so we can price for the risk as opposed to in a significant part of the sub prime business where we were about two to three years ago where the risk was unpredictable and we couldn't price for it.

And what we see overall is a higher return on managed assets in the near prime book because we have significantly lower expenses in near prime relative to sub prime.

Why is that?

It's because in sub prime you have a higher expense from the repossession and selling off the repossessed autos than you have in near prime where you have a lower incidence of repossessions.

So that's why we believe that's the sweet spot.

And even more so today as the captives are really retreating more and the independents like ourselves have more scope to consider.

Thanks very much.

Michael Helsby, Fox-Pitt, Kelton.

Bobby, I'd just like to ask you a question on the margin if I can.

I think in the Q you give the reconciliation of the movements in the repricing as giving you a positive benefit of 34 bips year on year.

I was just wondering if you could comment on sort of what's making that up.

If there's any benefit from repricing at the long end of the curve.

And just comment a little bit more on the competitive environment and how you see that going forward.

And just also on the cost of funds where that sort of hit you 74 bips.

I notice in the analysis you're basically saying that you've repositioned some of the swaps on the fixed-rate book and basically the impact of a 25 basis point rise on interest rates going forward is going to be less.

I think at the end of the year it was $213 million and at the end of the quarter it was just $89 million.

I was just wondering, is that going to then flow through into the margin as we look out from here?

Why don't I respond to the first part of your question and perhaps invite Simon and/or Douglas to respond to the second.

In terms of the impact of the rising long end of the curve and the competitive environment on our ability to price, I think both are positive.

So an upward sloping yield curve, higher longer rates combined with some of the take out of capacity in the mortgage origination business is positively impacting our ability to price.

And so I think from our perspective we see that as a continuing trend.

In terms of the repositioning of the swap book and the impact of further rising rates on that -- Simon, do you want to take that?

The language appears on page 51 of the Finance Corporation's 10-Q is what you're referring to.

That last related to the re-establishment of the accounting to follow -- the hedges.

But the amount of income volatility that we saw in the first quarter of last year is now less because, as we spoke earlier, we had to regain hedge accounting under both U.S.

GAAP and under IFRS.

That has nothing to do with the actual positioning of the interest rate GAAP, but the table does suggest that there is a decrease in the GAAP and that is correct, we have been progressively managing down the amount of interest rate risk within the Finance Corporation which has never been that large, but the (indiscernible) is indicative of some GAAP (technical difficulty) taking place over the last 12 months.

Okay, thank you.

Terrence Wong, [Narrow Broadband].

(inaudible).

My question goes to (indiscernible) comment on that also.

Because I want to see how are you going to tackle the problems like cost inflation and slight yield curve and the rising interest rates which may bring down your credit business.

And my second question is how are you going to boost and promote your business in areas like credit sales and mortgage business?

Could you perhaps repeat that question, please, because it's -- I couldn't --?

Sorry, my first question -- like how are you going to tackle problems like the cost inflation and the slight yield curve and the rising interest rate which could bring down your credit business?

I think if you look at the history of the Finance Corporation you basically see that in a rising rate environment -- first of all I think the question is is there high inflation expected?

I think over the next 12 to 24 months I don't believe that there is any prediction that we're going to have rampant inflation that's in turn going to cause nominal rates to increase dramatically.

Second, in an environment of a flat yield curve, I think we've all suffered through that for the better half of last year.

And I think we've demonstrated that through repricing efforts, through segmentation and analytic we have been able to stabilize net interest margin and, more importantly, stabilize risk-adjusted revenues by growing fee income.

Our belief also, and Douglas is much more connected to it than I am, is that a flat yield curve is a normal situation and we don't expect therefore a flat yield curve to pertain in terms of going into the future.

So for all of those reasons we believe -- and the fact that the Finance Corporation has empirically (indiscernible) the sessions in the past -- we believe that we're actually somewhat defensively positioned in terms of the environment going forward.

Lastly I would add that if the environment becomes dramatically worse, that we are further advantageously positioned because we will then have the opportunity to acquire portfolios of assets that might been in varying degrees of distress because other players may face funding issues which we manifestly do not.

So we have the opportunity to buy portfolios at attractive prices and therefore attractive yields and risk-adjusted revenue enrollment.

So for all of those reasons, both micro and macro, while we are by no means complacent, we believe we have the tools and the experience to manage through that environment.

I'm going to turn it over, Douglas, to you if you would like to add anything.

I think you put it very well.

I think one of the things that we've learned through our experience with the Finance Corporation is that if you have a business based on significant skills and credit analytics on collections then it's a vary robust business and perhaps has -- although there may be short term weakness in profitability in a downturn longer-term, the advantages in the credit analytics and collection metrics means that there is a significant resource base to put to an expanding number of people who require to be dealt with in that environment.

So barring sort of disaster scenarios, I think that the business would be well-positioned comparatively which would give us the opportunity that Bobby mentioned to buy portfolios that other people don't want to invest in the credit analytic and collection resource space to work through.

And indeed there have been many experiences even in the last three years where we've taken such opportunities.

We have no further questions in queue at the moment. (OPERATOR INSTRUCTIONS)

I think we've gone about ten minutes over the time we had indicated and I guess that maybe is reflective of people getting on with other parts of their day and of course their night as in Hong Kong.

Maybe therefore if I could on behalf of my colleagues at HSBC thank all of the participants on the call for their contribution and hope that we've helped their understanding of the first-quarter results and we look forward to speaking with you again when we announce the half year results for the Group in due course.

Many thanks for your participation.

Thank you for joining today's conference call.

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